WASHINGTON – Acting U.S. Internal Revenue Services (IRS) chief Danny Werfel faced tough questioning from a congressional panel about identity-theft tax fraud and redacted documents connected with the IRS targeting scandal.
Shortly before lawmakers headed out for summer recess, a House Oversight and Government Reform subcommittee convened a panel last Friday to examine the problem of identity-theft tax fraud.
Rep. John Mica (R-Fla.), the subcommittee’s chairman, said the number of fraudulent tax returns has grown from 456,000 in 2009 to 1.9 million this year, including around 212,000 incidents in which taxpayers contacted the IRS alleging they were victims of identity theft. The IRS paid out nearly $5 billion last year and could top $20 billion in illegal payments over the next few years, according to the Treasury inspector general for tax administration.
Identity theft occurs when someone uses another taxpayer’s personal information, such as name, Social Security number, or other personal information without permission to commit fraud or other crimes. In many cases, an identity thief might use a legitimate taxpayer’s information to fraudulently file a tax return and claim a refund.
When taxpayers file fraudulent return claims it takes more than a year in most instances to try to get identity problems resolved, Mica said.
“They’re left in limbo, and it doesn’t appear that IRS has a means of actually changing what’s going on. They’ve made some attempts, but obviously if you just look at the increases, the dramatic increases, whatever action IRS appears to be taking is not working,” he said.
Werfel defended his agency by indicating the IRS had opened 1,100 criminal investigations of tax fraud by June 30 of this year, exceeding the 2012 figure with three months remaining in the government’s fiscal year.
The IRS reported that during the 2013 filing season it stopped the issuance of $4.2 billion in potentially fraudulent tax refunds associated with almost 860,000 tax returns classified as involving identity theft.
Deputy Inspector General for Audit Michael McKenney said despite the efforts to rein in tax fraud, the IRS still has some work to do.
“The total impact of identity theft on tax administration is significantly greater than the amount the IRS detects and prevents,” McKenney said. “The IRS is not providing effective assistance to taxpayers who report that they have been victims of identity theft.”
McKenney said identity theft is still a growing problem for the IRS, noting, “The [IRS] does not know how many identity thieves are filing fictitious tax returns and how much revenue is being lost due to the issuance of fraudulent tax refunds.”
Rep. Gerry Connolly (D-Va.) pointed out the number of convictions for identity theft remains very low. Werfel could not provide an actual figure for 2013, but he said the number of sentences has increased to more than 300. Even that number is not enough, Connolly replied, considering the large number of fraudulent tax returns in the country.
The IRS has increased the number of employees currently working on identity theft cases to 3,000 and is approaching last year’s total of 5 million suspicious tax returns rejected, Werfel told the committee.
Nevertheless, he claimed efforts would be complicated by additional budget cuts proposed in Congress. A budget cut of approximately $1 billion since 2010, including a reduction of $618 million this year alone as a result of sequestration, has led the agency to cut about 8 percent of its full-time staff.
Without the Obama administration’s increase in funding as part of its 2014 budget, Werfel said his department would be forced to make “difficult choices.”
“We would no longer be able to sustain our current level of effort on identity theft without significant weakening of the programs,” he said.
President Obama’s budget provides for an increase of $101 million to support IRS efforts to prevent identity theft-related refund fraud. The budget also includs proposals to curb a rise in identity theft through tax returns, including a $5,000 civil penalty for tax-related identity theft.
The GOP budget proposal slashes the agency’s budget by $3 billion, nearly a 25 percent cut.
The hearing shifted gears and fireworks went off when Rep. Darrell Issa (R-Calif.), chairman of the Oversight Committee, arrived.
He accused Werfel of “slow-rolling” the investigation into the IRS targeting scandal by blacking out thousands of pages unnecessarily and failing to turn over necessary documents.
“I’ll tell you one thing — as these pages, which are almost impossible to figure out, are gone through by the Ways and Means Committee, you better hope, you better really hope that we don’t find something there that clearly should not have been redacted, which we expect we will,” the California Republican told Werfel.
The committee is trying to force the IRS to hand over a series of documents connected with the program in which the department subjected Tea Party and other conservative groups to additional scrutiny for their tax-exempt status applications.
Issa also called the IRS’s legal department “compromised.” He asked that presidential appointee William Wilkins, and the legal department he heads, be restricted from participating in the IRS’s clearance process for congressional committee information requests related to the targeting scandal. Wilkins was implicated in the scandal after a recent hearing disclosed his significant involvement in the tax-exempt application approval process.
Issa stood over a stack of documents more than a foot high that he said had redacted material.
“When you eliminate search terms unilaterally you are obstructing us by limiting the scope of discovery. Do you understand that, Mr. Werfel?” Issa said, complaining that the IRS had narrowed the date range for the requested documents.
Werfel responded that the accusations were “completely false” and there are “substantial facts and evidence” that demonstrate the process is moving forward.
“We’re getting better and more effective at producing this discovery on a day-to-day basis. I have more than 100 employees working on the document request that Chairman Issa raised a concern about,’ he added.
Issa said he had no other choice than to send the Treasury Department a subpoena for many of the documents. Shortly after the hearing, Issa delivered on his promise and sent a subpoena to Treasury Secretary Jacob Lew.